Attendo AB (publ) (ATT) Earnings Call Transcript & Summary

Please go ahead.

Thank you, and good morning, everyone. I'm glad to present the report that shows continued strong improvement, both financially and operationally. We are clearly on the path towards a sustainable financial situation and to reach our financial target of SEK 4 per share in 2024. In this presentation, we'll take you through the latest developments related to occupancy, cost inflation and other factors that are influencing our total group performance. I will start by giving you an update of the overall development and direction of Attendo in the quarter, and Mikael will then take you through the numbers in more detail. Next slide, please. Starting with the financial development in Q3, we displayed a growth rate in net sales of 22% and a doubling of the lease adjusted operating profit. The improvement is primarily driven by better terms in Finland, higher occupancy and operational improvements. I'm very satisfied with the positive development in Finland, which is well in line with the plan we presented in early 2021. The main growth drivers are improved commercial terms based on the past year's increases in staffing requirements and operational improvements. The development during the quarter also shows that despite the strained labor market, we have succeeded well in both retaining and growing our fantastic group of employees. As an effect, we have earlier than we anticipated, being able to return to positive occupancy growth, the trend we expect to continue into 2024. In Scandinavia, the reported result is down compared with the previous year. Year-on-year, we report higher results from own-operated Nursing Homes and stable results in Disabled Care, but also lower results in Home Care and in our Danish operations. Compared to the previous quarter, however, we can report a slight improvement in Home Care and Denmark, signs that we are stabilizing the result in Scandinavia into 2024. For next year, we expect to be able to compensate inflation with price adjustments in both business areas. We reported strong cash flow generation in Q3 as a consequence of improved results. And the positive results strengthened our financial situation, and we see a fast decline in our net debt-to-EBITDA ratio down from 4.1 last year to 1.8 in the end of Q3. Slide 6. One of our focus areas in sustainability is to improve well-being and quality of life for our customers. We measure this continuously over the years in our own surveys, which we disclose quarterly whenever we have updated numbers. We also rely on external benchmarks from relevant authorities where we operate. During this quarter, we received data on process quality from the National unit survey conducted by the National Board of Health and Welfare in Sweden. The survey is aimed at stimulating knowledge and operational development, primarily at the local unit level. Precise routines are the foundation of systematic quality work in care. And this year's unit survey shows that Attendo on average has a clearly higher percentage of existing routines in the Nursing Homes, service housing and Home Care units compared to national average. It also shows that Attendo's Nursing Homes provide better opportunities for activities, training, outdoor visits and housing adoption compared to national average. Next slide, please. So let's turn to occupancy development. Total occupancy for the group amounted to 86% by the end of the quarter, in line with Q2 and 1 percentage point higher versus Q3 last year. As I mentioned, I'm satisfied to see that we are again able to welcome more customers to our nursing houses in Finland. In Q3, we have re-taken the slight drop in occupancy that we had in Q2 in connection with the implementation of the new staffing requirements. With increasing employee satisfaction and decreasing staff turnover, we expect to be able to maintain the positive occupancy trend into 2024. Eventually, our goal is to reach above 90% average occupancy in all our markets. In Sweden, we had a slight positive customer inflow compared to Q2. Our ambition in the beginning of the year was to return to 90% occupancy already in 2023. Given the regional headwind in Gothenburg, with the placements we have since the beginning of the year towards private operators we believe, however, that the fulfillment of the 90% target will now be delayed into 2024. Next slide please, the top chart presents sales on a rolling 12-month basis on group level as well as for the business areas with improved terms in Finland and positive customer inflow in all markets, we will continue to show good organic growth during the coming quarters. The lower chart displays a rolling 12-month lease adjusted EBITA margin. Group margin is increasing for the third consecutive quarter, driven mainly by improved terms in elderly care segment in Finland, and we expect this trend to continue in the coming year. The key drivers in 2024 will be the full year effect of improved terms, overall higher occupancy and continued operational improvements. In Scandinavia, we have seen a gradual margin decline in the past years, initially due to occupancy drop during the pandemic and later due to cost inflation that we have not been fully compensated for by price adjustments. We are now starting to see a stabilization in conditions in some key areas, and we expect the margin in Scandinavia to start increasing again within the next 2 quarters. Now let's take a closer look into the financials for the quarter. And please go ahead, Mikael.

Thank you, Martin. Let's turn to Page 6. Net sales in the quarter increased to SEK 4.5 billion, which is up 22% when compared to the quarter last year. And organic growth for the quarter was 14.6% when we exclude foreign exchange effects. Organic growth was SEK 61 million or 3.7% for Attendo Scandinavia, driven primarily by prices and more customers in Nursing Homes. In Attendo Finland, the organic growth was SEK 476 million or 23.7% and primarily driven by improved terms. Currency effects had also a positive effect on sales with SEK 272 million. Slide 7, please. Reported EBITA increased by SEK 239 million to SEK 534 million and lease adjusted EBITA increased from SEK 171 million to SEK 346 million. Lease adjusted EBITA in Scandinavia decreased SEK 33 million year-over-year, while in Finland, the lease adjusted EBITA grew with SEK 190 million. IFRS-related effects when combining them together was SEK 64 million, out of which SEK 45 million is a nonrecurring nature on reported EBITA. FX also contributed positively to EBITA this quarter. Next slide, please. Net sales for Attendo Scandinavia increased by 4.3%, excluding currency effects. The growth is mainly driven by price adjustments and net new sold beds in owned Nursing Homes. Growth was partly offset by lower revenues within Home Care and outsourced Nursing Homes. As I just mentioned, we reported lower profit year-over-year in Scandinavia. Main factor is that we haven't been able to offset higher cost with higher price in 2023. Also on the segment level, Home Care in Denmark still showed lower results year-over-year. At the same time, we see a stabilization in these areas versus Q2 by the end of the quarter. And we report higher results from our own operations in both elderly and Disabled Care. The price conditions in Scandinavia for next year is not yet set in all local authorities, but we have some visibility based on recent development. And based on that, we foresee that we will be able to compensate higher cost with price adjustments in 2024. Also to note that from now and during 2024, several outsourcing contracts are ending, in total, SEK 320 million annual turnover. And at the end of Q4, we expect approximately SEK 200 million in turnover that will end with above average terms. Next slide, please. For Attendo Finland, the growth was 37% reported and 24% in local currency. And lease adjusted EBITA increased from SEK 37 million to SEK 249 million. The positive development is mainly an effect of price adjustments that are now catching up to historic cost development and the increased staff requirements and which will continue to have a positive effect into Q1 2024. We've also been able to execute transition in a favorable way for the staff index increase earlier in the spring. As a result, we have been able to welcome more customers with strong increase in September, and we expect this trend to continue in Q4 and into 2024. The annual agreed salary increase took effect 1st of September and will now have full effect in Q4. We are currently negotiating the terms for 2024, and our expectation is that we will be able to at least compensate higher costs with price adjustments next year. And please remind that we will have a Q1 effect from this years price adjustments as they were effective from April 1. Slide 10, please. Now this table shows our cash flow development. I think free cash flow was strong at SEK197 million, driven by the profit improvements, but also supported by positive working capital development as we saw a positive improvement of temporary wealth for overdues in Finland. In the quarter, we also repaid SEK 50 million in loans, affecting our total cash flow, which was SEK 142 million. Next slide, please. Looking at the financial metrics that we follow, the adjusted earnings per share improved due to improved lease adjusted EBITA and was expected, slightly offset by increasing financing costs as the interest rates are significantly higher versus 1 year ago. The tax rate for the quarter was 22.3% on a reported and adjusted basis, while slightly inflated in the quarter due to losses in Denmark. Tax rates are now normalizing as we're making tax profits in Finland. The lease adjusted EBITA margin shows a clear and positive trend during the last quarter and is now at 3.7% on a rolling 12 months basis. As a result of increased profits, we continue to improve our net debt-to-EBITDA ratio, down from 4.4 by the end of the year to 1.8 in Q3, and it's a trend we expect to continue also in Q4. Net interest expense was higher than the comparison quarter, but in line with Q1 and Q2 this year. On a rolling 12-month basis, the net interest expense increased, and we expect interest cost to continue to increase Q4 versus comparable quarters due to the increasing market rates. Next slide, please. This shows an indicative path to reach our midterm financial target of SEK 4 per share. The earnings per share rolling 12 months is SEK 2.41. The main levers for improvement from current run rate is continued positive effect from the Finnish operations. We've made a strong profit improvement in Finland this year, but there is still ample opportunity for further improvement. The adjusted terms and care for olderly people from this year to get full effect in Q4 and Q1 2024. We also put a lot of attention now to increase the occupancy in Finland, and we expect the positive trend in Q3 to continue in Q4 and into 2024. In addition, we see potential for further operational improvement now that the staffing requirements has been fully implemented. And we are, as we mentioned, currently in the process to negotiate the price turns for 2024. And all in all, we expect at least compensate for higher costs. From Scandinavia, we expect to be able to turn the negative trend in Home Care, and we expect to return to breakeven in Denmark in 2024. As mentioned, in terms of occupancy, we're still below the 90% target, and we expect to gradually reach that level in 2024. We also expect to compensate higher costs with neutral price adjustments in 2024. Higher interest cost, though, as mentioned earlier, will continue to have a negative impact due to higher interest rates and financing costs. However, improved profitability will lower our leverage and should allow for improved capital allocation and for M&A. So in the original plan, we had not anticipated the full impact of high inflation and sharp increase in interest costs, which makes the road longer, but we still see good opportunities to reach the SEK 4 per share during 2024. With that, I hand over to you, Martin.

Thank you, Mikael. Next slide, please. Before summarizing the quarter, I'd like to recap on our short-term operational focus that I outlined in the last quarter. In Finland, our top focus is still to ensure access to qualified staff, which is a prerequisite for us to improve occupancy. In Q3, we clearly see that the staff turnover is decreasing. We can staff up more easily and are hence able to welcome more customers to our units. Occupancy in Finland is now on a positive trend, which we expect to continue into 2024. As the staffing situation is stabilizing, we also see overall potential in Finland to improve the operational excellence into 2024. We're currently negotiating terms for Disabled Care and Social Psychiatry in Finland for next year. All in all, for Finland, we expect price increases to at least offset cost inflation in 2024. For Scandinavia, our top priority is to continue the journey towards 90% occupancy in Nursing Homes. But the biggest hurdle, as I previously mentioned, right now, is a regional headwind in Gothenburg with the placement roof since the beginning of the year towards private operators. As we expect the placement roof to be gradually lifted, we are confident to reach our occupancy targets in 2024. We are actively working with advocacy work towards local authorities to get compensation for inflation and hence reach sustainable terms for next year. We've seen progress in Q3. And even though we have not seen the final results from all local authorities, we expect full compensation for inflation going into 2024. The ongoing program to improve Home Care and turn the operations in Denmark back to profitability are making progress. As a result, we should see a gradual improvement in the coming quarters. Next slide, please. To summarize this quarter, we present strong growth and a continued bottom line recovery, driven by the development in Finland. Improvement strengthens our financial position and makes Attendo better equipped to continue investing to the benefits of customers, payers and employees. Given the development in Q3, we are on track to reach our midterm financial target of SEK 4 per share in 2024. Thank you for listening, and over to you, Andreas.

Okay. Thank you, Martin. We'll start with the questions over the phone and then take questions in the chat of the conference call. So please, operator, go ahead.

[Operator Instructions] The next question comes from Kristofer Liljeberg from Carnegie.

It's Kristofer from Carnegie. I have 2 questions. First, on your commentary about margin in Scandinavia. If I heard you correctly, you said you should start to improve margin again in the next 2 quarters. So I wonder is when you talk about offsetting inflation with higher prices, is that also going to give you some compensation for the fact that the price increases have been lagging inflation in 2023 as well? Or is it just for the new inflation, so to say?

For the new inflation, we expect to be compensated into '24. We expect over the next couple of years to gradually be able to start closing the gap and not necessarily into next year.

Okay. And so the margin improvement you expect to see anyway, is that related then to a turnaround in Denmark? And is Denmark still loss-making? And also what do you see you could do with profitability in the Home Care business?

Yes. So you're correct. It's related to both Denmark and Home Care, but also a continued occupancy improvement in other segments. If you look at Denmark, we are making losses still in Denmark. And we expect those losses to gradually diminish into a breakeven situation next year. So on the full year 2024, we don't expect to make losses in Denmark, we expect that to show black numbers. If we look at the Home Care business, by the end of the quarter, we can see that the Home Care business is improving. We have a clear turnaround plan in order to adapt to new terms in some of the Home Care regions. But we see that going according to plan, and we expect to gradually keep improving Home Care over the next couple of quarters and make a stronger 2024 than 2023.

And if you're going to turn breakeven in Denmark for full year 2024, is it possible to give any sort of indication what the year-over-year positive effect on lease adjusted areas?

Yes, at least around SEK 40 million, if you look at the full year 2023 compared to what we expect next year.

Okay. That's helpful. And then my second question, this relates to Slide 12 with the EPS bridge. Should we interpret this as that you should be able to reach EPS of at least SEK 4 without M&A or, for example, share buybacks, and then potential upside from that?

Exactly.

Okay. And could you just comment how -- because I think you mentioned also that when you announced that target, of course, inflation was much lower, interest rates were not as high. So where do you perform better than the original plan?

I think we're seeing a much better development in Finland than we had originally anticipated.

The next question comes from Jakob Lembke from SEB.